Financial modelling: Supporting businesses with robust models Financial Advisory
Financial modelling
Our team of Financial Advisory experts specialise in financial modelling and work collaboratively with our clients to deliver tailored, integrated models that distil large and complex datasets into simple outputs.
Financial modelling can be broadly defined as the building of a software- based toolkit to represent a specific real-world or hypothetical financial situation. Financial models have a wide variety of use cases and are often developed or commissioned by finance teams to enhance understanding of a business or situation or to support strategic decision making. ‘Financial model’ is a catch-all term that is colloquially used to cover anything from a simple piece of single- spreadsheet financial analysis to a dynamic tool that generates a suite of outputs and scenarios from a complex, interconnected set of mechanics based on the operational, accounting and investment structures of a subject asset or business. The use of financial models to enhance analysis and inform key decisions is central to maximizing the effectiveness and efficiency of finance functions, and their utility to the wider business.
2. Financial planning and reporting: Modelling to support business forecasting, scenario analysis and business case preparation – includes providing solutions to enhance management information and to increase the efficiency of financial reporting. 3. Bespoke decision support: Tailored financial models to support understanding and decision making in respect of a unique or specific situation. Who builds financial models? The information analysed and presented by finance teams plays a vital role in the decision-making processes that enable strategic development within businesses and underpins risk management and compliance. Whilst many finance professionals have the capability to conduct detailed financial analysis in tools such as Microsoft Excel, few have the skillset and experience to build robust and dynamic financial models that can reliably deal with complexity and produce genuinely informative, tailored and trusted outputs. A key discipline for finance teams – as with any profession – is knowing the boundaries of one’s own expertise, and understanding when a situation would be best served by utilising the skillset of professionals with pure focus on a niche discipline.
Use cases
Whilst the use cases are broad, most financial models fall into one of three categories: 1. Transaction and valuation modelling: Provision of financial models to support a range of activities including deal modelling, fair value assessment, investment appraisal and re-financing.
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Excellence in financial modelling: The key requirements
1. Technical expertise
2 1 Many financial models have a close relationship with financial reporting standards (be that IFRS, UK GAAP or another) and a company’s own accounting policies. Integrated three-statement forecasts form the basis of a number of modelling use cases and it is important that the inputs, mechanics and outputs are consistent with the actual accounting treatment adopted or intended. Another key sub-set is models used in valuation or other forms of investment appraisal. Such models must reflect correct accounting treatment but also the adjustments required such that analysis is conducted in a technically correct manner in accordance with best practice and methodologies detailed by the International Valuation Standard Council (IVSC). In order for such financial models to be accurate and suitable for their intended use, it is essential that modelling expertise is married with the required accounting and valuation knowledge during the planning, development and testing phases. 2. Accounting and valuation knowledge
5 3 Combining modelling expertise, best practice and experience with the necessary accounting and valuation knowledge is a good recipe for building highly functional and informative financial models. For many use cases however, specific situational experience is also of paramount importance. Where models are developed to analyse and present specific information in support of a particular situation, a detailed knowledge of the processes and commercial considerations at play is vital in order that the mechanics can be accurately developed, and the outputs properly understood and utilised. Where the purpose of a model is defined by complex rules and regulations relating to a particular situation, the right experience is necessary to ensure appropriate logic is applied to the model calculations. For instance, corporate finance experience is required to ensure deal models reflect the commercial and practical realities of M&A and restructuring experience is essential to ensure entity priority models reflect the realities of distressed transactions and liquidation. 3. Situational experience
“Financial modelling is one of the most highly valued, but thinly understood, skills in financial analysis” 1 . The ability to develop high-quality, highly functional financial models is dependent on expertise in financial analytics, coding languages and data-management. As with all technical disciplines, mastery comes through both training and experience, with a seasoned financial modeler having a fundamentally superior ability to navigate the plethora of challenges than an intelligent novice. Equally important are adherence to best-practice build processes and a deep respect for review and quality control procedures. The inherent risk of spreadsheets is widely understood, with research having shown that about 50% of spreadsheet models used operationally in large businesses have material defects 2 . A risk-management mindset is of fundamental importance.
1 Corporate Finance Institute, 2 Cornell University
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FRP’s approach is to combine modelling expertise with technical and situational experience, tailored to each situation. Our team of dedicated modellers are technical experts with years of experience building financial models for a range of use cases: we produce high quality models that distil complex business situations into easily digestible outputs. We work alongside teams with in-depth accounting and valuation knowledge, and situational experts with deep experience in corporate finance, debt and restructuring advisory. Our approach
Richard Sanfourche Partner Financial Advisory London +44 (0)7957 720 618 richardsanfourche@frpadvisory.com
Summary use cases
1. Raising finance – utilising an integrated three statement model to determine the most suitable financing option for a company or asset. 2. Valuation and investment appraisa l – detailed discounted cash flow and multi- criteria valuation models to determine the value of a business or asset based on recent and expected future performance. 3. Evaluating investment returns – modelling expected returns from specific investment structures such as a leveraged buyout.
combining a set of integrated business assumptions with historical and benchmarked data to forecast the future state of a business under defined scenarios. 5. Capital allocation – scenario and sensitivity analysis to evaluate the risks and rewards of different potential projects to determine the optimal way to allocate capital. 6 . Entity Priority Analysis – accurate modelling of expected returns to the creditors of each legal entity in a group under defined transaction, liquidation or restructuring outcomes.
Jim Davies Partner Financial Advisory London +44 (0)7841 829 826 jim.davies@frpadvisory.com
4. Financial and operational forecasting –
Mark Thomasson Associate Director Financial Advisory London +44 (0)7704 346 526 mark.thomasson@frpadvisory.com
Related services
Financial Advisory
Corporate Finance
Valuation Services
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FRP Advisory Trading Limited
110 Cannon Street London EC4N 6EU
FRP Advisory Trading Limited is a company incorporated in England and Wales registered number 12315855
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January 2024
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